Liquidity levels in the amalgamated Jindal Iron and Steel Company (Jisco) are less than adequate and can potentially lead to its bankruptcy in the short run, according to a report by independent auditors Kalyaniwalla & Mistry, which was appointed by the Bombay High Court to evaluate the financials of the company. Business Standard has a copy of the report. |
The independent auditor was appointed by the court after the income tax department and one of the company's creditors, Balli Kloeckner GmBH, objected to the merger. While the income tax department has put up a claim of around Rs 62 crore, German trader Balli Kloeckner's claim is to the tune of Rs 133 crore. |
However, the report states that the amalgamated company will have sufficient cash to meet both these claims in the near future, up to March 31, 2005, subject to certain conditions. Says the report: "It is highly unlikely that the amalgamated company will be required to actually settle the claims of the objecting creditors immediately. Such an eventuallity is likely to take several months at least. Cognizance must also be taken of the amalgamated company's ability to meet the claims of the objecting creditors in the near future." |
Seshagiri Rao, chief financial officer, Jisco, said: "This is a positive report as it confirms the capability of company to settle its claims. We feel that the provisions that report mentions will not stand in the way of fulfilling our committments." |
The auditors' mandate was to assess the ability of the merged entity to meet all its liabilities, including those of the objecting creditors and the income tax department. |
As per the report, which adopted the methodology of J Wilcox 'gambler's ruin' prediction formula, the 'Z score', representing the bankruptcy risk, is below 2.7 and close to 1.80, indicating a high to very high risk of bankruptcy over the short run. |
The amalgamated company's liquidity is less than 1.5:1 whereas 2:1 is considered safe and the acid ratio is well below 1:1 both for the year ended March 31, 2004, as well as for fiscal 2005. |
ICICI Bank, the leading creditor of Jisco, has also clarified, the report states, that any repayments or settlements made by JVSL with its lenders in excess of what was envisaged earlier shall be brought in by the Jisco business in the form of an interest free advance. |
"As per the company's first-quarter results in the current financial year, the company has reources to settle the claims of the creditors immediately," Rao said. |
The provisions stated in the report say, among other things: "ICICI Bank will either waive or does not have any requirement for the shareholders or the promoters of Jisco to bring in interest free advances equivalent to the amounts of the claims of the objecting creditors, or the promoters of Jisco will bring in any required interest free advances." |
The report also says: "While setting aside sufficient cash to meet these claims, the company will manage to avoid risk of bankruptcy, unutilised funds based facilities will be fully available in the event of need of financial support and projected financial statements and cash flows will prove accurate." |